Oil prices hit a fresh high on Wednesday on fears militant attacks would destabilise Saudi Arabia and pushed down the dollar but European shares rose after an overnight rally on Wall Street. The high oil price triggered safe-haven buying of euro zone government bonds, pushing yields lower. Gold rose in Europe, with oil supporting bullion, a hedge against inflation. U.S. light crude hit a new record high of $42.45, the highest since futures were launched in New York in 1983, but later eased. The contract was last at $41.87 a barrel, off 46 cents. Brent crude for July was off 52 cents at $38.56. Oil surged $2.45 on Tuesday on fears of supply disruption after a deadly weekend attack in the Saudi oil city of Khobar.
"The disruption fear won't go away soon. Only Saudi Arabia has surplus capacity and if its oil flow should be disrupted, it could bring a hopeless situation," said Tony Nunan, manager at Mitsubishi Corp's oil unit in Tokyo. The dollar fell to near two-month lows against the euro and three-month lows against the Swiss franc on worries that high oil prices might slow the U.S. economy. Dealers see European currencies as a good defensive play as they are thought less likely to weaken if oil hits growth. "They were never really bought on assumptions of strong growth," said Shahab Jalinoos, currency strategist at ABN AMRO in London.
The dollar was down nearly 0.3 percent on the day against the euro at $1.2272. It was down a similar amount against the Swiss franc at 1.2439. Oil is also putting the greenback under pressure as a higher price is seen making the increases in U.S. interest rates, which the market has priced in, less likely.
BAYER BOOSTS EUROPEAN STOCKS
European stocks edged up, boosted by talk of a sales upturn at German drugs and chemicals group Bayer . Financial Times Deutschland said Bayer's sales in April rose 4.3 percent from a year earlier. This offset worries about oil. The FTSE Eurotop 300 index <.FTEU3> of pan-European blue chips was up 0.78 percent and the narrower DJ Euro STOXX 50 index <.STOXX50E> added 0.88 percent. Japanese stocks closed lower as high oil prices hit some exporters and a big fall in shares of UFJ Holdings Inc <8307.T> hit the banking sector overall.
The Nikkei average <.N225> closed 0.48 percent lower and the broader TOPIX <.TOPX> index lost 0.65 percent. "Higher oil prices do affect the global economy and investors are very nervous because they can't imagine how much higher (oil prices) may go," said Tsuyoshi Nomaguchi, a senior strategist at Daiwa Securities. UFJ, the only loss-making bank among Japan's top four lenders, sank for a seventh consecutive session after Goldman Sachs said it took the bank off its Current Investment List. U.S. stocks closed higher as investors focused on strong factory and construction data and put aside worries over oil. Oil producers' shares rose on the higher crude price. The Dow Jones Industrial average <.DJI> closed up 0.14 percent and the tech-focused Nasdaq <.IXIC> rose 0.2 percent. U.S. stock index futures were a shade higher, indicating a modestly positive start on Wall Street.
The yield on the two-year German Schatz note was down 1.5 basis points at 2.57 percent. The 10-year German Bund was yielding 4.36 percent, down 0.6 basis points. Spot gold was last at $396/396.75 an ounce, compared with $394.30/395.05 at Tuesday's New York close. The -Commodities Research Bureau index <.CRB> of 17 futures closed on Tuesday at 281.75, close to a 23-year high of 285.28.///